Euro Recovers Ground - Is There A Dominant Trend?

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 |  Includes: ERO, FXE
by: FXstreet

The euro trades firmer against the dollar, although as most crosses, it remains confined to a narrow range, as consolidation continues in the FX market in the absence of any significant data or events. However, eurozone woes continue to linger, reflected by persisting uncertainty over whether Spain will accept conditionality in exchange for ECB support and concerns over the funding shortfall in Greece.

European stocks were little changed, while Wall Street futures strengthened ahead of economic data. Today, ECB President Draghi is due to speak. Also on tap are the July S&P/Case Shiller home price index, and September consumer confidence index in the US.

Euro bounces off lows - is there a dominant trend?

The euro failed to make a clean break of the 1.2900 support level and bounced, erasing intraday losses into the New York opening. EUR/USD is trading at the 1.2940/50 area slightly up on the day, having hit a low of 1.2885 earlier.

The euro has steadily retreated from the 1.3170 area where its rally lost momentum last week, although the setback has been contained by the 1.2880 zone so far. It seems to be a growing consensus among analysts on that EUR/USD price action has been merely consolidated this week, although they remain split on the shared-currency fate in a longer-term view.

"The EUR has made marginal new lows overnight, but like the rest of the FX majors the move hasn't been anything more than consolidation," says the TD Securities team. "Unpredictable headlines are still the biggest EUR-driver at the moment, which typically makes for choppy price action, but with the medium term trend is still bearish, we still prefer selling rallies in the short term here."

TD Securities also notes that Core Eurozone-US 2-year spreads have not matched EUR/USD's impressive rise over the past two months, "and are still more consistent with a EUR level below 1.25".

Meanwhile, the UBS team points out that the dollar sell-off over the past few weeks has stalled as foreign exchange markets fully digest the Fed's decision to launch a new round of asset purchases. "Lackluster global economic data has helped nudge the needle back towards the risk-averse end of the scale. The actions of other central banks have also helped arrest the dollar's decline with dovish voices in the ascendancy," they explain. "We acknowledge the risk of further dollar weakness should the Fed accelerate its bond purchases, but this is not a done deal and we see limited further dollar downside over the months ahead."

Regarding EUR/USD, UBS keeps a bearish bias long-term. "Market pressure could increase in the weeks ahead though, and higher periphery yields will likely help cap the euro," they say. "Soft data is also taking its toll and, with further austerity in the pipeline, we stick to our long-term bearish view on the euro."

On the other hand, Rabobank analysts see risks of EUR/USD falling to 1.26 in the near-term but expect EUR/USD to trend towards 1.3500 on a 12-month view. "We have penciled in risk of a move back towards the EUR/USD 1.2600 level on a 1 mth view given the prospect of a revival of Eurozone tensions," says Rabobank. "That said, on the back of the Fed's accommodative monetary policy we expect bouts of USD strength to be temporary and for EUR/USD to trend towards 1.3500 on a 12 mth view. For now the 200 day sma at EUR/USD 1.2828 is likely to act as key support."

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